As The Crisis Deepens, Gold Flows East – Part 3 (of 3)

Gold fell $3.10 or 0.23% yesterday and closed at $1,326.30/oz. Silver fell $0.12 or 0.6% and closed at $19.72.

Gold climbed today supported by increased fund buying on target for its largest monthly gain since January 2012, fuelled by hopes for a continuation of money printing and bond buying by central banks. The U.S. Federal Reserve’s policy statement is at 1800 GMT, but unlike the last meeting, Chairman Ben Bernanke will not hold a news conference to give any further guidance.

In today’s Market Update we end this 3 part series with a closer look at one of Sanders’ key arguments: that the Consumer Price Index or CPI has been manipulated since the early 1980’s in the U.S. and has continued unabated by successive administrations. According to Sanders, not only is the CPI manipulated but the reporting of the employed / unemployed numbers is also erroneous. There has been no improvement in employment number since 2008. Indeed, employment has stagnated since the late 1980s. The U.S. is not alone and the UK government has also ‘rejigged’ what the CPI basket contains so that it can return statistics that mask the real inflation rate(s).

Mauldin reports that the precipitous decline in full time jobs in the U.S. started back in 2002 and accelerated after 2008. The number of part time jobs has risen by 3m, while full time jobs have decreased by a similar amount. Though U.S. centric, Mauldin’s observations point to a fundamental change in how the social and economic structures of our economies are changing.

It’s worth repeating: In the shadow of this game, gold looks like a solid investment.

When The Data Is Bad, Make Up The Data

Analysts of the situation appear to fall broadly into two camps: deflationists who rightly fear the unemployment and demand destruction inherent in QE and ZIRP and hyper-inflationists who equally rightly fear the unrestricted debt monetization inherent in QE.

We can safely ignore those who support this suicidal socio-political policy mix as being more interested in attending Davos with eye candy on their arm or securing an elite sinecure than in working to maintain social stability and the broadest possible survival rate in the challenging decades to come.

The truth is that what we are seeing is the destruction of the world monetary system in the most thorough way imaginable. This is not exactly deflation nor inflation. For more than forty years since the “opening” of China by Kissinger and Nixon, wealth has been siphoned out of the West by the assumption of ever more leverage. No majority in any western industrial democracy would have voted for this, hence the need for “free trade” agreements the consequence of which has been the effective disenfranchisement of organised labour.

Nor could it have happened had governments and markets not colluded in the progressive vandalising of government economic statistics. Beginning with the Reagan administration, which exchanged the housing component of CPI for something called “imputed rent” during the housing bubble of the early 80s, and given an intellectual veneer by the Boskin Commission during the Bush the Elder administration, headline U.S. consumer price inflation (CPI-U) has been deliberately and systematically understated.

This has served several purposes. First it reduces government liabilities in programs such as government pensions and social security that are indexed to the inflation rate. Second, it serves to increase the net present value of financial assets and thereby encourage public investment in the markets, the better to keep the bull running.

The abuse of hedonic measurement, which seeks to assign a value to qualitative improvements in products, substitution of CPI components with the highest prices on with “equivalents” that are cheaper on the assumption that consumers will switch in response to price signals are two tricks of the trade.

Nor is the abuse of data confined to the CPI. In recent years employment and unemployment measurements have been inflated and deflated respectively by not counting those who are so “discouraged” that they stop looking for mainstream employment and counting those with multiple part time jobs as though they have as many bodies as jobs. A better measure is employment as a % of the population, not an arbitrarily defined “work force.”

There has been no improvement to the employment numbers since 2008. Indeed, employment has stagnated since the late 1980s.